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Startups often overlook creating a business model; when initially conceptualising their idea, but this can be a crucial mistake. Everyone from first-time founders to experienced veterans at the helm should prioritise developing a business model to identify how they create and deliver value to customers, employees and stakeholders.
According to a survey conducted in 2017, startups that worked on an effective business model early on saw their organisational success ratio double over the long term while also seeing a 7% higher likelihood of growth than those who did not focus on their business model early on. But what exactly is a business model, and how can you create an effective one? Let’s first look at an example to understand why a Business Model for a Startup is essential.
Why Business Model for a Startup?
Let us understand the concept by taking an example. Let’s say there is a startup called HomeKeys with a revolutionary smart home security system developed in response to the rising crime rates and challenges in employing a security team in apartment complexes.
One way is to rush to the market with the offering targeting urban residential areas, and the other is to hold one’s horses take a deep breath and develop a business plan.
Identify opportunities beyond the low-hanging fruit, the need to build business agility should the product not resound as well as anticipated with the end-customers, identify opportunities beyond the first run.
In short, it requires understanding the target market, potential churn rates, customer acquisition costs, and unit economics, in other words, a Business Model, for a successful launch.
A business model would consider the following factors –
- Market research to identify the specific segments of the market that are most likely to be interested in their product, such as homeowners with young children or those living in high-crime areas.
- Evaluate the potential churn rates and customer acquisition costs and design a freemium model that offsets initial losses with a higher-margin recurring revenue stream.
- Create an intuitive user interface and robust customer support to improve customer retention and generate positive word-of-mouth.
- Explore & identify possible new opportunities for the product
Careful consideration of these factors while developing a well-researched and thought-out business model and strategy will help HomeKeys’ launch success.
What is a Business Model, and How Can Startups Create One?
Now that we have established why startups must create a business model, let us briefly discuss what a business model is, the components of a business model, and what are the steps taken to create one.
A business model outlines a company’s operations, products, services, and target market. It describes how a company reaches its market and generates revenue sources. A good business model can help a company understand its place in the marketplace and determine ways to generate revenue effectively before it launches its product.
Several components make up Business Model for a Startup, including the product’s value proposition, the target market and customer, the cost structure of the products, and the distribution channels to sell the products. Let us briefly take a look at each factor.
Product Value Proposition
The value proposition sets your company apart from its competitors and makes you unique and different from everyone else. For instance, looking at ‘HomeKeys’ earlier case, the company could offer a full suite of security solutions, including hardware (door cameras, bells, security cameras) & software (application to manage devices) that integrates with the majority of mobile operating systems.
In essence, it would allow customers to upgrade their security periodically, with each new product bought offering additional features and continuity, adding to the company’s ability to upsell its products and make the cost of switching away higher.
The Target Market
The target market is who you aim to serve, the specific consumers who will buy your products or services. In the ‘HomeKeys’ example, as identified earlier, the target market would be families with children and those living in high crime rate areas.
This is perhaps the most critical factor when considering launching a new business. Revenue streams include the sources of income your company generates, such as upfront sales or subscription revenues. In the ‘HomeKeys’ case, the company should design a mix of hardware sales, subscription revenue, and licensing fees for quick profitability.
The company’s financial budget outlines how much you spend on operating costs each year; this includes salaries for employees and expenses like office rent and advertising. Creating a well-designed financial budget involves balancing growth along with the cash at hand to extend the runway.
Furthermore, startups will need to track key metrics such as the revenues generated, customer acquisition costs, and burn rate to understand their funding needs.
Startups need to identify how they can reach their target customers, and this involves understanding their distribution channels -> including online sales, retail stores, or other partnerships.
Together these components help create a Business Model for a Startup and how you want to operate and generate revenue. Below are the steps outlined to start a Business Model for a Startup.
- Identify The Problem that your product is trying to solve – This may be a functional problem, an emotional problem, or both. Limit your choice to a maximum of three key issues.
- Identify the target customers –
- Who are the people we are bringing a solution for?
- Define three customer types for each issue you identified in the previous step.
- Matching customers & problems -Ideally, match each problem to a customer type, but sometimes it may be more complex. The same customer type may experience multiple issues, or a different customer may experience the same problem.
- Define The Solutions For Your Products – List up to ten solutions, then narrow it down to the three that can be implemented quickly and without significant financial or time resources.
- Create a Monetisation Strategy – You’ll have defined a product or service for your chosen solution and the customer type. For that product or service, specify up to five possible monetisation strategies. Zero onto two for quick testing.
A business model is essential for startups aiming a long-term growth. A business model helps a company identify and target its target audience and identify the most effective ways to generate revenue. It also provides a framework for expanding operations, increasing the customer base, and planning for scalability. Creating a business model is essential to setting up a startup for success, ensuring it achieves its long-term growth goals.